Newly released surveys show that salary increases will remain in a steady state in 2009, rising by the same average as the last two years. But with an unsure economy, experts say, employers must find other ways to compensate their employees in order to retain them. And communication efforts are crucial.
The nation's employers are expected to expand their pay budgets by an average of 3.9 percent across all employee categories, regions and industries in 2009, according to a new survey released by consultancy WorldatWork, based in Scottsdale, Ariz.
That figure matches the pay budget increases seen in both 2008 and 2007, according to the firm -- a sign, experts, say that shows the economy is hanging tougher than perhaps is evidenced by other economic figures.
That 3.9 percent forecast matches the prediction made in Towers Perrin's 2008 Global Compensation Planning Report that was released earlier this year, and is slightly higher than Mercer's recently released prediction of 3.7 percent, and the 3.5 percent increase in merit pay forecasted by Watson Wyatt in July.
Such forecasts should not be followed blindly, says Jim Stoeckmann, senior practice leader at WorldatWork.
"HR executives should watch with some caution for economic signs, and they need to look at their industry especially," for guidance on salary increases, he says.
Stoeckmann says the forecasts indicate "a stable working market, and it points to the resiliency of the economy in general."
"We're not seeing wage inflation, but we're not seeing employers pull back, either. ... Employers intend, on average, to fund salary increases similar to recent years, and that's good for both employers and employees. It reflects stability in economy."
That stability of the last three years reflects a leveling off of pay hikes following a continuing climb from the historic lows of 2003 and 2004, according to WorldatWork, which used information from 2,700 organizations representing 13.6 North American employees to make its predictions.
Over at Mercer, Steve Gross, the global broad-based performance and rewards consulting leader based in Philadelphia, agrees, saying his company's prediction of a 3.7 percent salary increase for 2009 falls in line with last year's stated increase of 3.8 percent.
"There's really no statistical difference in those numbers," he says. "The salary increases about the same next year as last year," he says. "In one sense, business is uneven, energy prices are unstable, we're starting to deal with inflation, and there's a mixed bag of corporate profits. So ... most folks are taking a steady-state approach and going with a continuation of the same."
But salaries are hardly the only means of compensating employees, and companies need to recognize the importance of offering alternative means to keep employees retained, experts say.
"Organizations continually evaluate the attractiveness of their entire rewards package and develop new programs accordingly," says Anne C. Ruddy, president of WorldatWork. "They are investing in other areas of total rewards, such as employee development, training and work/life balance.
"For example," she says, "the number of organizations offering telework as a flexible-work program is up significantly (40 percent) compared to a year ago."
The WorldatWork survey also highlighted an area where raises are expected to rise above the stated average: high-performing employees. Such employees are expected to receive raises of more than 5 percent in the coming year, compared to below-average performing employees, who can expect 2 percent raises or less.
"If you've got workers with the combination of high skill and high performance, then you're going to want to make sure they're getting paid more than that 3.9 percent increase," Stoeckmann says.
That puts "more pressure on HR to spend the money wisely," Gross says. "There are limited dollars, clearly limited resources and the question becomes how to allocate them. There's pressure to treat everyone the same, but on the other hand, who are my most critical employees? What's most important going forward?" he says.
"So what they are doing is that they're planning more and differentiating more, based on performance rating. Highest-rated employees will get disproportionately more than lower-performing employees. There is a lot more paying for performance and more differentiation on the variable side," Gross says.
Gross says that, while there are some industries that are getting harder hit than others, the overall picture is not that bad.
"If you're in the mortgage industry, it is terrible," Gross acknowledges. But, he says, "it's not universal. It's not everybody, and I think that's part of the story. This is a cycle, we'll get through it, we'll plan for the future. Companies just don't want to get caught short."
Mel Stark, vice president, region reward practice leader for the Northeast at the Hay Group in Philadelphia, says the recently released surveys push back against some previous moribund assessments.
"Earlier in the year, in March and April, there appeared to be some signals that some [salary] freezes would take place, that people would be taking a more conservative approach," he says. "This data seems to mitigate that, but one has to be sensitive to pockets of both the economy and what industry and what region. A lot of it is going to be based on individual company needs and strategies."
Stark says the current economic situation provides companies with "opportunities for companies to more effectively communicate the entire reward proposition to the entire workforce.
"Our research and client experience tells us that the better companies do have a more rigorous approach to reward communications, and they find multiple points of reinforcing their philosophy through those communications as well," he says.
He also says that the best companies regularly produce total-reward statements for their employees in order to give them a better view of their pay packages.
"Many employees don't really understand the full value of what appear to be matter-of-fact benefit plans," he says.
Total reward plans sometimes include contributions to a 401(k) plan or total value, so that on a dollar-equivalent basis, they get employees to focus on the broader spectrum of a reward package rather than just a paycheck, he says.
Stark also says companies need to realize that when it comes to communicating salary issues to employees, no news is not always good news.
"You always have to be careful because people will talk. In the absence of no news, people will make up their own stories," he says. "There's no guarantee that your message will get across to everyone, but in the absence of that message, people will make up their own stories, and that's not what you want people to be hearing."